Public procurement rules

Public procurement rules governing development agreements have been undergoing increasing scrutiny from the European Court of Justice. A 2010 decision is being seen by many as a solution to the procurement problems development agreements are facing in the property industry. This guide looks at the impact of that decision.

The Office of Government Commerce has published guidance on when public procurement rules should apply to development agreements in the UK. For more information, please see our separate Out-Law guide.

The facts of the case

The agreement in question bore no relation to a UK development agreement. The case concerned the sale of a site used as military barracks in Wildeshausen, Germany. In October 2005, the local authority decided to undertake feasibility studies for an urban planning project on the land.

At the start of 2007 the Bundesanstalt, the German federal agency responsible for managing public property, closed the barracks and invited tenders with a view to a quick sale. It received four offers. Among these, GSSI submitted a tender of €2.5m and Helmut Müller offered €400,000, which it later increased to €1m. The tenderers submitted their proposed plans and discussed them with the local authority in the presence of the Bundesanstalt.

The Bundesanstalt assessed the plan submitted by the two companies. It favoured GSSI's project, subject to the correct planning procedures being concluded. In June 2007 the Bundesanstalt sold the barracks to GSSI with the agreement of the local authority, Wildeshausen Town Council.

The contract between the Bundesanstalt and GSSI was a contract for the sale of the land. The Bundesanstalt had not contracted jointly with Wildeshausen council, which was the planning authority responsible for granting planning permission for the project. Helmut Müller brought an action in the German courts alleging that the sale was void because the public procurement rules had not been followed.

At the first hearing the German court decided that the public procurement rules did not apply as the contract was not a public works contract. Helmut Müller appealed claiming that the contract was a works contract, which took the form of a works concession. A concession is a form of public works contract under which the consideration given by the contracting authority consists of, or includes, the grant of a right to exploit the work being carried out under the contract - for example, a toll bridge. At this point, the court decided to refer a number of questions to the ECJ.

The public procurement rules apply to public works contracts for either the execution, or the design and execution, of construction, civil engineering or building works corresponding to the requirements specified by the contracting authority. A 'work' means the outcome of building or civil engineering works taken as a whole that fulfils an economic or technical function. The 'requirements specified by the contracting authority' are explored below.

Questions for the Court of Justice

Was the sale contract in this case a public works contract? The ECJ reiterated that the sale of land by a public body is not a public works contract. It helpfully added that a works contract requires that a public authority assumes the position of a buyer, not a seller, and that the contract must be for the execution of works. The sale contract between the Bundesanstalt and GSSI was not a public works contract.

Did the dealings between Wildeshausen council and GSSI give rise to a public works contract? The ECJ examined the relationship between the landowner, GSSI and the council as the planning body. It emphasised that, in a public works contract, the contracting authority must agree to receive a service in return for consideration. In this case the council was giving, not receiving, a service.

European procurement laws catch the award of contracts, not other activities such as functions the council must legally carry out or granting planning permission. The fact that the grant of planning permission is in the public interest does not of itself create a public works contract.

The ECJ held that the service must be of immediate economic benefit to the contracting authority. In this sense, 'immediate' is probably best translated as being of 'direct' economic benefit. Immediate/direct economic benefit:

is established where the public authority becomes the owner of the work in question;

may also exist where the public authority is to have legal rights over the works so as to make the resulting project available to the public;

may also lie in the economic advantages that the contracting authority may derive from the future use or transfer of the work, the fact that the contracting authority contributed financially to the realisation of the work or the assumption of the risks should the work fail economically;

may be received by a contracting authority even if it does not acquire a material or physical object;

does not arise merely because the contracting authority is the regulatory planning authority.

Did the relationship between the two public bodies create a public works contract? Agreements where a first contracting authority entrusts a second with the execution of work may constitute a public works contract. Although the Bundesanstalt and the council had collaborated in this case, the ECJ ruled that this did not amount to a joint procurement.

The ECJ indicated that transactions should be considered together and that the procurement rules might apply in the event of a two-phase procedure, namely where one authority sells land and another awards a works contract. Consequently, authorities must be careful when working together to sell and develop land. However on the facts of this case, and because the council did not create any legally binding obligations at the time of the sale, the procurement rules did not apply.

Does the contractor have to be under a direct or indirect obligation to carry out the works that are the subject of the contract? Yes, although it is irrelevant whether the contractor itself carries out the works or uses subcontractors to do so. However, it is essential to the concept of a public works contract that the contractor assumes a legally enforceable direct or indirect obligation to carry out the works.

What is the meaning of 'the requirements specified by the contracting authority'? The ECJ's answer on this issue was less clear. It ruled that the contracting authority had to have defined the type of work or, at the very least, have had a decisive influence on its design. However it was clear that the mere fact that a public authority may have examined plans as part of its urban planning powers does not meet this requirement. The exercise of regulatory planning powers is intended to protect the public interest, not to obtain a contractual or economic benefit for the planning authority.

Public works concessions: Helmut Müller suggested that the contract was a public works concession because GSSI had been given the opportunity to exploit the work for financial gain. The ECJ disagreed. It ruled that for the contract to be such a concession, the contracting authority must be able to transfer the right to exploit the work. The court decided that where land is already owned by a third party - in this case, GSSI - it is impossible for a public authority to grant a concession allowing the operator to exploit it.

Looking forward

The judgement helps, but it does not mean that development agreements do not need to go through the public procurement process. The ECJ's interpretation of the concept of 'immediate economic benefit' indicates that many development agreements should be procured in accordance with the rules.

The ruling is useful because it confirms that for a public works contract to come into being, the contractor must assume an obligation – whether direct or indirect – to carry out work. This obligation is inherent in, and at the very heart of, development agreements.

The decision does not deal with a situation where one public authority sells land and another has already decided to award a contract to carry out works on that land. However, it hints that a court might be keen to catch such arrangements in the right circumstances.

It is important to ensure that competitive tendering maximises value. The way to do this is to tender compliantly, efficiently and cost-effectively. By cutting the costs of tendering, the number of bidders is likely to increase and financial savings on competitive tendering need to be made for the benefit of all parties.

Authorities need to examine their requirements at the outset, as well as the route by which these will be procured. If an authority has to undertake an expensive procurement exercise in order to be compliant, it should re-examine its requirements. Non-essential elements should be pared back and alternative methods of achieving the scheme should be examined. However if a particular process is the only way to achieve compliance then that route must be followed.

Authorities should consider withdrawing less essential elements of schemes that might make them subject to procurement rules. They should also examine the possibility of selling land outright. Perhaps a development agreement is not really necessary – the existence of an end user or the commercial realties of the situation could mean that a scheme will be delivered in any case. Authorities could sell land without imposing an obligation to build, but with the benefit of buy-back options if a scheme is built.

In the case of larger schemes where the rules apply, authorities must prepare their procurement at the outset. Procurement exercises must be well-run and tightly controlled, and the authority should ensure that its expectations are made clear from the start. Certainly, the procurement costs will need to justify the end reward for both the authority and the private sector.